Industrial and Corporate Change, Volume 18, Number 2, pp.

209221
doi:10.1093/icc/dtp007
Advance Access published February 24, 2009

Introduction: The internationalization

of Chinese and Indian firmstrends,
motivations and strategy*
Suma Athreye and Sandeep Kapur

The recent corporate evolution of China and India has been characterized by
increased internationalization of firms in the form of significant outward foreign
direct investment flows and overseas mergers and acquisitions. To provide a
context for the papers in this ICC special issue 18:2 (2009), we outline the
quantitative and qualitative patterns of internationalization activity of Chinese and
Indian firms, identify factors that motivate these firms to invest overseas, and
describe the internationalization strategies they have adopted.

1. Introduction
The last two decades have seen significant internationalization of firms from
developing economies in terms of their greater participation in international
trade, growing outflows of foreign direct investment (FDI), and a surge in their
cross-border mergers and acquisition activity. Outward investment from developing
countries is not a new phenomenon but in recent years there has been a marked
increase in the magnitude of flows and a qualitative transformation in their pattern.
Flows of outward FDI from developing countries rose from about $6 billion in
19891991 (about 2.7% of global outward flows) to $253 billion for 2007 (nearly
13% of global outflows).1 The stock of outward FDI from developing countries rose
from around $145 billion in 1990 to $2288 billion in 2007 (about 8% of global stock
of FDI in 1990 to 14.6% of global stock in 2007).2

*This introduction draws on ideas that emerged at two workshops on The Internationalization of
Chinese and Indian Firms, organized at UNU-MERIT (Maastricht) in September 2008.
1
See World Investment Report 2008, Annex Table A.I.8 and Table B.1. In terms of its sectoral
distribution, in 20042006, around 70% of outward FDI flows from developing countries were in
the services sector (within which business services, finance, and trade were the leading categories),
with manufacturing accounting for 13% and the primary sector accounting for around 8%.
2
See World Investment Report 2008, Annex Table B.2.

The Author 2009. Published by Oxford University Press on behalf of Associazione ICC. All rights reserved.

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 210 S. Athreye and S. Kapur

Within this broad trend, the growing internationalization of firms from two
fast-growing developing countries, China and India, is particularly notable. Exports
have been a central feature of the growth of the Chinese economy over the last three
decades and, more recently, they have made a visible contribution to Indian growth
too. Outward FDI from China and India has grown rapidly in recent years, and
firms from these two countries are increasingly involved in overseas mergers and
acquisitions.3
Morck et al. (2008) provide a summary of outward FDI from China. Outward
FDI flows from China were around $22.5 billion in 2007; the stock of Chinese
outward FDI grew steadily, from $4.5 billion in 1990 to $96 billion in 2007.4
A significant chunk of Chinese outward FDI has gone to tax havens and to Southeast
Asia, but recently a substantial amount has flowed to Africa too. Sovereign wealth
funds (SWFs) have become a new channel for outward FDI, with the China
Investment Corporation, established in 2007, playing a significant role. Chinese
overseas investment has focused on oil and petroleum (with China National Petrol
Corporation and China National Offshore Oil Corporation leading the charge), but
there have been significant investments in construction (China State Construction
Corporation), shipping (China Shipping), telecoms (China Mobile and China
Telecom), and steel (Shanghai Baosteel) too. Much of the outward investment from
China is carried out by large state-owned enterprises (SOEs).
Nayyar (2008) describes outward FDI from India, whose flows grew from
negligible levels in 1990 to $13.6 billion in 2007, and stock rose from $0.1 billion in
1990 to $29 billion by 2007.5 Outward FDI from India has spanned investments in a
broad range of sectors, including steel, pharmaceuticals, information technology and
services, as well as food and beverages. Indias Oil and Natural Gas Commission
has made substantial investment in oil and energy; Indian conglomerates such as the
Tata group have made overseas acquisitions in automobiles (acquiring Jaguar in the
UK) and steel (the Anglo-Dutch firm Corus); Ranbaxy has made global forays in
pharmaceuticals and Infosys in information technology and business processing.
Firms from China and India have been involved in significant and growing levels
of mergers and acquisitions abroad. Over the period 20052007, cross-border
purchases by Chinese firms average about $3.5 billion per annum, while those by

3
Aggregate statistics apart, many of the firms aggressively on the path of internationalization are
from China and India. For instance, two-thirds of the 100 firms identified as new global
challengers in a recent Boston Consulting Group (2006) report are Chinese or Indian.
4
See World Investment Report 2008, Annex Tables B.1 and B.2. When referring to China, we ignore
values recorded under Hong Kong (China) and Taiwan (China). FDI outflows from China and
India seem small compared to developing-country totals, but this is in part because statistically
recorded totals are dominated by a handful of countries, notably Hong Kong (China) and a few
offshore financial centres.
5
See World Investment Report 2008, Annex Tables B.1 and B.2.

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 Internationalization of Chinese and Indian firms 211

Indian firms averaged $1.5 billion per annum. To the extent M&A activity is financed
with funds raised in international markets or in the host economy the acquisitions
are not fully recorded in measured FDI outflows. Hence measures of outward FDI
probably underestimate the extent of internationalization of firms from these
two countries.
The patterns of internationalization of Chinese and Indian firms suggest some
common elements. Both countries have experienced rapid growth in recent decades,
which led to large inflows of FDI and portfolio capital. These inflows, combined with
high rates of domestic saving, created large reserves of capital at the macroeconomic
level, which in turn led to relaxation of policy restrictions on capital outflows. Policy
regimes that had previously prohibited capital outflows at the corporate level became
increasingly permissive. Much of the recent outflows took place within the context
of easy credit conditions in global financial markets, though this situation has
changed dramatically since the summer of 2007.
These similarities should not mask the important differences in the patterns of
internationalization of Chinese and Indian firms. While Chinese overseas acquisi-
tions are more commonly carried out by state-owned enterprises, Indian outward
FDI involves mostly private-sector firms, typically the large, diversified, business
houses. Chinese overseas investments are more likely to have been in primary sectors,
notably minerals and energy, while Indian investments are more distributed across
a range of sectors, including steel and pharmaceuticals at one end to information
technology and business services at the other.
These differences are probably related to differences in the policy environment
that have guided the industrial evolution in these economies. Despite the economic
liberalization that started in China in the 1980s, state-owned enterprises continue to
play an important part in the Chinese industrial sector. Given the dependence of
the economy on sustained exports, many of the Chinese overseas investments aim to
secure access to critical raw materials, especially energy. Indias industrial sectors, in
contrast, went through many policy gyrations. India was remarkably open to inward
FDI all through the 1950s, allowing a substantial stock of foreign capital to build up.
Through much of the 1960s the policy of import-substituting industrialization
allowed considerable scope for private enterprise, creating a significant pool of
private firms. Economic liberalization in the last two decades allowed a cadre of
professionally run Indian firms to emerge in skill-intensive sectors such as
information technology and pharmaceuticals, and these firms have been particularly
active in overseas markets.
However, these trends towards growing internationalization of China and India
must be kept in perspective. Even as outward FDI has grown for both countries, the
flows remain paltry relative to the size of these economies and relative to global FDI
flows. Outward FDI flows as fractions of gross fixed capital formation were only
1.6% for China and 3.5% for India for the year 2007. Compare these to 6.4% for the
developing countries as a whole and 16.2 for the corresponding global ratio.

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 212 S. Athreye and S. Kapur

Outward FDI stock as a share of annual GDP was 3% for China and 2.6% for India in
the year 2007. The corresponding value for all developing countries was 16% and
for the world economy was 29%.6
So why have these fledgling flows commanded so much attention? For one,
both China and India are large and populous developing countries and their recent
growth spurt has captured the popular imagination. Further, the emerging outward
orientation of these countries reflects a distinct break from their historical
trajectoriesboth China and India were inward-looking economies for much of
the post-war period, and recent trends may presage their arrival on the international
scene.
The newfound outward orientation is notable for some of its qualitative aspects
too, of which two stand out in particular. One, the time profile of flow of FDI
does not conform to the conventional predictions of the investment development
path taken by developing countries. Traditional theories envisage developing
countries graduating through various stages, starting from a stage where inward FDI
allows domestic firms to acquire technology and other manufacturing capabilities,
then graduating to a stage where domestic industrial capability allows these firms
to export their output, only eventually investing overseas, and typically only in
economies lower down in the stage of development. By design of their economic
regimes, both China and India developed their industrial bases through policies of
import substitution without recourse to massive inflows of FDI in the early stages.
And for both countries, outward FDI flows have emerged much sooner than
expected, whether compared to the trajectory of early industrializing nations or more
recent industrializers such as South Korea. Two, some of the capital outflows and
acquisitions have been to developed economies rather than, as is often expected,
to less developed economies. Tata, the large business conglomerate from India, has
made high profile investments in the UK, while Chinas Lenovo and Haier have made
substantial inroads in the US.
At one level, the outward flow of capital from developing countries to acquire
assets in developed countries presents a conundrum. Ordinarily, we should expect
the rate of return on capital to be higher for investments in a fast-growing developing
economy rather than for overseas ventures in industrially advanced economies.
To put it simply, the uphill flow of capital from labour-rich developing countries
to the developed world does not fit textbook economic theory.
One possible explanation is contextual. Liberalization may have given firms an
opportunity to diversify their real investment portfolios. The logic of diversification
may make it rational for a firm to expand overseas even when the return on such
investment is lower, as long as returns domestically and overseas are less than
perfectly correlated. The Indian firms that have led the internationalization process

6
See World Investment Report 2008. Both countries also rank quite low in terms of UNCTADs
outward FDI performance index, which measures a countrys outward FDI relative to its GDP.

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 Internationalization of Chinese and Indian firms 213

are those that were well diversified across domestic industrial sectors: consider the
Tata group, whose interests range from manufacturing steel to food & beverages, and
running hotels to business process outsourcing. In the past, regulatory constraints
on diversification abroad often compelled these firms to diversify domestically,
beyond levels that can be explained by technological economies of scope. Once policy
became suitably accommodating to outward FDI, international diversification
followed quite naturally. In many cases, the firms quest for economies of scale
also motivate them to invest abroad. This is particularly true in sectors such as
steel and metals.
At the same time, some of the overseas investments may have been prompted by
push factors: policies that distort the rates of return on capital at the enterprise
level create an imperative to venture abroad. In China, distortions in the financial
intermediation process, combined with a high rate of private savings, may have
driven down the rate of return on domestic investments, forcing firms to look
overseas for more lucrative opportunities. As Morck et al. (2008) put it, Chinas
recent outward FDI surge is probably a manifestation of its inability to reinvest
its high corporate and individual savings efficiently.

2. Motivations
While a more permissive economic regime is necessary for firms to venture abroad, it
is not sufficient. What, then, motivates firms to invest overseas? A leading theoretical
approach, the so-called ownership-location-internalization (OLI) theory, explains
the internationalization activity of multinational corporations (MNCs) as their
attempts to extend their ownership advantages (e.g., proprietary access to a superior
production technology or a valuable brand) to overseas markets by exploiting
locational advantages (locating abroad to access low cost inputs or better serve local
markets), and internalizing the efficiency gains from economies of scale and scope by
integrating the firms activities across borders. In short, FDI enables firms to exploit
their existing firm-specific assets. This standard explanation has limited traction
when analyzing the internationalization activity of MNCs from developing countries.
Typically, these firms have only limited technological or ownership advantages
to exploit.
Rather, the internationalization activity of firms from developing countries may
reflect attempts to acquire strategic assets, such as new technologies and brands, and
to secure access to raw materials and distribution networks. In sum, rather than
exploiting existing assets, FDI may reflect attempts to acquire or augment these
assets. In principle, technological assets can be acquired through arms length
contracts such as licensing, or generated through domestic R&D, but market imper-
fections may imply that acquisition is more effective through FDI. Child and
Rodrigues (2008) argue that Chinese firms have internationalized not so much to

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 214 S. Athreye and S. Kapur

exploit competitive advantages, but to address the competitive disadvantages

incurred by operating in exclusively domestic markets.
The linkage, leverage, and learning model developed by Matthews (2006) aims
to capture the idea that latecomer firms will use their overseas investments
and global linkages to leverage their existing cost advantage and learn about new
sources of competitive advantage. If so, internationalization may contribute to the
building of ownership advantages rather than merely being an outcome of existing
advantages. This is not necessarily reversing received wisdom: empirical research has
found that the relationship between ownership advantages and outward FDI is often
weak (see, for instance, Belderbos and Sleuwaegen, 1996). One may also argue that
the rationale for vertical FDI is similar to that of vertical integration: securing stable
supply, avoiding coordination problems and reducing transaction coststhis does
not need ownership advantages in the form of proprietary assets.
Kumar (2008) has argued that the term ownership advantage should be enlarged
to include the specific capabilities of developing country firms. Some firms
from India and China have acquired a niche in frugal engineeringthe ability
to manufacture low cost versions of goods for mass markets. Some Indian firms
have developed skills in managing multi-plant operations across regions that are
heterogeneous in their ethnic, linguistic and cultural makeup. It could even be that
forms of corporate governance forged to cope with restrictive regulatory regimes in
domestic economies may have endowed Indian and Chinese firms with a resilience
that proves a comparative advantage in alien markets with weak legal institutions
and insecure property rights.7,8
What, then, are the proximate reasons for firms from China and India to venture
abroad, and what factors have enabled them to do so with any degree of success?
One important reason is to gain access or proximity to overseas markets. In a
major survey of transnational corporations from developing countries carried out
by UNCTAD (see World Investment Report 2006, page 153), a majority of firms from
China and India reported seeking overseas markets a major motivation for investing
abroad. While Chinese manufacturing firms can gain access to international markets
through exports, in some cases overseas investments are a means of improving access
to markets or preemptively securing access against potential protectionist barriers.

7
Morck et al. (2008) point out that when the Canadian-owned Petro Kazakhstan exited from
Kazakhstan due to its inability to enforce its contractual dues, China National Petroleum
Corporation acquired its assets and subsequently was far more successful in enforcement.
8
In fact, more contemporary forms of the OLI theory recognize that investment may be motivated
by the search for strategic assets in the form of technology, market access, and even the desire to
access a particular institutional context: see Dunning and Lundan (2008) for an elaboration of the
argument, and Dunning and Lundan (2009) for an attempt to study LenovoIBM as an example of
such an institutional hybrid.

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 Internationalization of Chinese and Indian firms 215

Similarly, Indian IT firms report proximity to potential clients as an important

reason for investing abroad.
A second motivation for firms to invest abroad is to secure access to resources,
especially natural resources and raw materials. As security of access to essential
raw materials is considered important for economic growth, state-owned
enterprises have been at the forefront of acquiring ownership stakes in overseas
mining and energy sectors. China National Petrol Corporation and China National
Offshore Oil Corporation are typical firms in this category, and Indias Oil and
Natural Gas Commission has also made substantial forays abroad.
Some investments are technology-seeking in intent. Of course, the use of foreign
investment as a technology-acquisition strategy is not peculiar to China and India:
Korean firms such as Samsung and Hyundai combined foreign investment with
international technology licensing to build their technological capabilities.9 However,
the stronger IPR regimes that have emerged in recent years could have created a
bias towards technology-seeking overseas acquisitions rather than arms-length
technology acquisitions. In part, this is so because ownership of technology assets
allows more experimentation. Technology is an important element in the inter-
nationalization of Indian pharmaceutical and software companies. In many cases,
this is complemented with the desire to acquire brands and distribution networks
that can better appropriate returns to technology investments made by the inter-
nationalizing firms: Lenovos acquisition of IBM assets and Haiers investments
in the US provide examples. Notably, some Chinese firms have tried to use their
toeholds in overseas markets to develop their own brand identity. In some sectors,
such as Indian firms investments in steel, overseas acquisitions may enable firms to
exploit economies of scale and scope. In that sense, some overseas investment may
be efficiency seeking.
Some explanations of increased internationalization fall outside the above
categories. For some firms, the rush to go overseas is fuelled by the desire to steal
a march over domestic rivals: there appears to be a strong competitive element in
overseas acquisition strategies of Indian business houses.10 In other cases, outward
FDI is seen as a part of a national strategy, but this is probably exaggerated and
captures the anxiety of some in recipient economies.
Somewhat distinct from the motivations that lead firms to venture abroad,
there is the question of the business strategies that internationalizing firms adopt.
The choice of how to internationalize is likely to depend on the modes of
internationalization available (often directly determined by policy restrictions on
forms of outward and inward FDI) and the competitive environment the firm faces
in the global market. In addition, Ramamurti and Singh (2009) argue that the stage

9
See Lee and Slater (2007) and Matthews (2006) for an elaboration of this point.
10
An early version of this argument was made by Stephen Hymer (1960).

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 216 S. Athreye and S. Kapur

of internationalization may also matter, pointing out that the existing literature
in international business strategy has very little to say about the early inter-
nationalization strategies of firms.

3. Studying the internationalization of Chinese and

Indian firms
The papers in this special issue and the conference presentations that led up to this
collection of ideas represent a careful attempt to study the nascent internationaliza-
tion of Chinese and Indian firms. Collectively, these papers offer insights into the
strategies adopted by these firms on their path to internationalization.
The paper by Fortanier and van Tulder compares the pattern of international
expansion of large firms from China and India with those from developed countries.
They examine the level, pace, variability and temporal concentration of inter-
nationalization activity of 256 large firms over the period 1990 to 2004. They find
that Chinese and Indian firms in their sample have internationalized more rapidly
and more recently, so that they have a more volatile trajectory of internationalization
relative to developed country firms. Significantly, they also conclude that Chinese
and Indian firms are not as internationalized as sometimes thought: much of their
capital assets and sales remains located in their domestic economies. They find that
the sectoral distribution of internationalization activity for the two categories
developed country firms versus firms from China and Indiashows limited overlap.
Some sectors, such as food & beverages and retail distribution, are largely the
preserve of developed country multinationals. Others such as steel, materials,
shipping, and construction have seen a surge of internationalization activity by
Chinese and Indian firms. Both developed and developing country multinationals
are active in sectors such as chemicals and pharmaceuticals, oil and petroleum, and
telecommunications.
In their paper, Kumar and Chadha compare the recent evolution of steel industry
in China and India. Unlike many developed countries where stagnant or declining
demand for steel has forced the exit of many manufacturing firms, the demand for
steel is relatively buoyant in China and India. Large-scale investment in steel
manufacturing was a common feature of early industrialization in both countries
allowing firms to develop the necessary expertise. A more liberal regime towards
outward FDI has allowed Chinese and Indian firms to venture overseas, both in the
form of greenfield investments and acquisitions. However, they find crucial
differences in the underlying motivation across the two countries: Chinese outward
FDI aims predominantly to secure access to raw materials for expanding domestic
steel production, with very few international production operations. In contrast,
Indian steel firms have ventured abroad to seek markets and strategic assets, both
to exploit economies of scale and economies of scope across steel-dependent

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 Internationalization of Chinese and Indian firms 217

manufacturing sectors such as automobiles. In the Chinese case, state-owned

enterprises have been most active abroad, while in India private sector firms have led
the drive to internationalization (the Indian public sector steel monolith, SAIL, has
been noticeably inward-looking).
Niosi and Tschangs paper compares the trajectories adopted by Chinese and
Indian firms in the software industry. They conclude that the internationalization
process differs for Chinese and Indian MNEs, but these are related to the different
sub-sectors in which they have chosen to operate. Chinese software firms have
focused on their domestic market by working with foreign MNEs and focusing on
regional markets in Japan, Taiwan, and Korea, while Indian firms continue to expand
overseas using a customized-services model shaped by the US market. In both cases,
greenfield investments have been the dominant form of investment, although
acquisitions have increased in importance for Indian firms in recent years. Both
Chinese and Indian firms have found it easier to grow and internationalize in
small niches that lack competition from US and European firms. In cases where
competition has been more head-one.g., software products for the finance
sectorthe success of Indian and Chinese firms has been less assured.
The paper by Athreye and Godley compares strategies adopted by firms at
the early stages of their internationalization. They demonstrate that there are
many similarities in the leapfrogging strategies adopted by US pharmaceutical
firms in the 1930s, at the cusp of the antibiotics revolution, with the current
strategies adopted by Indian pharmaceutical firms. Both groups used internationa-
lization as a strategy to gain a technological edge and to acquire firm-specific
advantages, but the paper emphasizes the significant role played by interna-
tional acquisitions in the Indian case. They speculate that this difference might be
explained by the larger technological gap faced by Indian firms and the climate
of stronger intellectual property protection which is likely to favour acquisitions.
Their paper also suggests that sector specificities and the economic environ-
ment can explain internationalization strategies when the stage of development is
controlled for.
The three sector studies thus offer contrasting ideas about the motivation and
modus operandi of internationalization. Some Indian pharmaceutical firms might be
motivated to emulate the technological leapfrogging achieved by US pharmaceutical
producers in the past, but while US firms relied on international alliances Indian
firms have depended on joint ventures and acquisitions. In the steel sector, where
scale economies are crucial to international competitiveness, India and China appear
to be gaining market shares through acquisitions but their motivations differ.
In the software sector, Indian and Chinese firms diverge in both motivation and
strategy.
The last paper in this special issue looks more closely at two of the large
internationalizing conglomerates from China and India. Conglomeration is natural
in the corporate evolution of many developing countries, although China and India

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have different histories in this regard.11 Many Indian business houses have had a
long history of corporate evolution, whilst Chinese groups are relatively young and
their rapid growth in recent years is partly due to active state support. Duysters,
Jacob, Lemmens, and Jintian compare Chinas Haier group with Indias Tata group.
They point out that Haier has used a walking on two legs strategyreplicating
in overseas markets the innovations developed to cater for the needs of large
domestic market and at the same time acquiring related technological expertise
internationally in order to grow from a single product to a multi-product company.
They draw on work by Goldstein (2008) to show that, in contrast, Tatas have
used internationalization to become more specialized in their operations and
to increase value from a few chosen lines of business. Although the industry
sectors that comprise the group firms are different, the paper shows that in
both countries the groups have used globalization to exploit economies of scale
and scope.

4. Policy Implications
These analyses pose a natural question: what is the economic impact of such
emerging internationalization for China and India, and for the advanced economies
that have served as hosts to investment flows? Also, what policy implications arise
from our assessment of the likely impact?
Among potential recipients of foreign direct investments from China and India,
many developed economies have long espoused openness to inflows. Greenfield
investment by foreign firms has been seen by many governments (especially in the
UK and the EU) as a valuable channel for expanded investment and employment
generation. Further, inward foreign investment may improve domestic productivity
through spillovers of technology, through the demonstration effect of better
management practices, and also because competition from MNEs provides stimulus
for efficiency improvements in domestic firms.
However, many Indian and Chinese multinationals have entered international
markets through acquisitions of existing assets rather than greenfield investment.
This is, of course, consistent with the observation that Chinese and Indian firms have
fewer ownership advantages. A study by Mata and Portugal (2000) of the closure and
divestment of 1000 foreign-owned firms that started operating in Portugal during the
period 19831989 shows that the mode of entrygreenfield versus acquisition
affects the longevity of the investment. They argue that greenfield investments
are more asset-specific and dependent on the ownership advantages, and likely
to be more durable. In contrast, acquisitions often involve the purchase of a

11
Khanna and Yishay (2007) argue that this is on account of institutional voids and missing
markets.

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 Internationalization of Chinese and Indian firms 219

complementary but non-specific asset. The non-specific nature of the acquired asset
results in a lower exit thresholdsay, if international expansion plans falter or if
there is a strategic re-orientation within the acquiring firmand also is easier to sell
to someone else. If so, it would be rational to find a policy preference for greenfield
investment over acquisitions as the mode of entry.
Public reaction to the acquisitions by Chinese and Indian firmsand the political
economy behind these reactionsis mixed. In many cases, acquisitions have been of
failing firms. Bertoni et al. (2008) find, for instance, that Chinese acquisitions in
Europe are more likely to be of poorly performing firms. Recent notable acquisitions
by Indias Tata group include those of Corus and Jaguar, both firms in different
degrees of financial distress. In all such cases, it is likely that the post-acquisition
rationalization of these firms will result in labour retrenchment rather than
employment generation. To the extent these were firms in distress, some retren-
chment would have happened regardless of foreign takeover, but whether overseas
firms are seen to be saviours or asset-strippers depends on careful enunciation of
corporate strategy. Tata, with a credible record of successful labour relations, are
well placed to cope with this, but may yet need to tread carefully.
The potential of productivity-enhancing spillovers from the operation of Chinese
and Indian firms requires a more cautious assessment. As Driffield et al. (2009)
point out, the potential for technological spillovers is low when FDI inflows
are technology-seeking rather than technology-exploiting. Nonetheless, the entry of
foreign firms could well increase the degree of competition in the industry, with
potential gain in productivity.
Public perceptions of Chinese and Indian MNCs are inevitably tied up with
reactions to the recent growth of these countries. While most people consider
Chinas success in low-cost manufacturing for global consumers to be a positive
development, the inevitable rise of China and India as significant economic players
causes consternation by challenging the established order of industrial hegemony.
Consider the growing unease with the entry of large sovereign wealth funds, and the
concerns that these are largely instruments of an overbearing Chinese state. Of
course, the dominance of state-owned enterprises in Chinese internationalization
may be structural: unlike Indian business houses, a poorly developed domestic
capital market might imply that state sponsorship is critical for Chinese firms
overseas ventures. But at the same time it creates the perception that these firms are
beneficiaries of unfair state aid, an argument that resonates with old debates
about strategic trade policy.
The implications of internationalization for the home economies, that is, for
China and India, are also subject to debate. One view expresses concern that outward
FDI can deprive developing countries of scarce capital, including human capital in
the form of managerial resources. This is reminiscent of early concerns about brain
drain, but a more balanced position has come to understand that what starts as brain
drain can become a part of two-way brain circulation, and in any case, even if these

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 220 S. Athreye and S. Kapur

flows are perverse, it is hard to control them in an increasing globalizing world.

An alternative view sees the emerging internationalization as the coming of age
for Chinese and Indian corporate sector and a measure of their ability to compete
globally on equal terms. However, this more celebratory approach carries risks too:
when competitive foreign acquisitions become an end in themselves, they carry the
risk of irrational excess. It is conceivable that many of the acquisitions currently
being celebrated as badges of success will result in corporate failure, especially as the
world struggles with a financial crisis that is likely to persist. Nonetheless, analyzing
the internationalization of Chinese and Indian firms should provide rich rewards
for research, and until the process is better understood, it would be sensible to call
for a relatively neutral policy towards their internationalization.

Acknowledgments
We thank all participants for helpful comments, and especially R. Ramamurti for
detailed suggestions on this text.

Addresses for correspondence

Suma Athreye, Brunel University, UK and UNU-MERIT, Maastricht. e-mail:
suma.athreye@brunel.ac.uk
Sandeep Kapur (Corresponding author) School of Economics, Birkbeck, University
of London, Malet St, London WC1E 7HX, UK. e-mail: s.kapur@bbk.ac.uk

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